Budgeting and Forecasting

Budgeting Bias

Page from August 2021 GFR

People are not rational, but we often assume they are. For example, classical economics is based on the assumption that people are rational maximizers of their self-interest. Recent Nobel Prize-winning scientific research, however, has shown that this is not true. Rather than thinking through decisions rationally and comprehensively, people use mental shortcuts to make decisions. Much of the time, this is harmless and even helpful, but sometimes our shortcuts backfire.

Behavioral scientists have cataloged a number of these shortcuts and when they can go wrong. When these shortcuts fail, they are called “cognitive biases.” These biases can have a negative effect on all types of decisions, including budget decisions. But if we know these biases, we can plan mitigations.